“Ya can’t roller-skate in a buffalo herd.” – Roger Miller, from the song of the same name
No, it wasn’t Apple (AAPL). It wasn’t Amazon (AMZN) either, nor was it the Fed that sent markets up a couple of percent last week. It was the end-of-the month rally and it was April. Look for equity markets to move up again on Monday (absent some fresh horror from overseas) and try to follow suit on Tuesday, though the latter attempt may require a minimal level of behavior from the ISM manufacturing report that morning.
That other stuff didn’t hurt none, as Gene Hackman might have said (think of the sheriff in The Unforgiven). But the declining-volume move of the last three days of the week had all the familiar earmarks of the paint-the-tape moves we’ve come to associate with certain times of the year, in particular the spring and year-end. It’s telling that the Treasury market rose for the sixth straight week, in effect betting on the opposite direction, in its longest run-up since June 2011. It isn’t really comforting to know that the latter coincided with the first leg of last year’s big equity swoon.
The rebound in Apple, while sharp, lost strength after the first day, partly due to the company’s confusingly opaque guidance about the second quarter. Sales are going to be less than what they said earlier, but since Apple’s guidance is usually well below the plausible anyway, it wasn’t exactly clear what that meant. Later remarks by some of its component suppliers, including Cirrus (CRUS) and Triquint (TQNT) made it plain enough that the company is emptying out the 4-series of the iPhone this quarter, probably in preparation for a big launch in these cond half.
As for Amazon, it was lucky enough to report after Apple’s spectacular price rebound and reap some of the ensuing madness. A great deal of nonsense and outright fiction was repeated about a company whose quarterly income fell over 40% from the previous year, managed fresh lows in operating margins of 1.5%, and guided to a quarterly range where the midpoint is an expected loss. But it beat estimates. Pretty good stuff for a company growing operating cash at 1% a year. At this rate they could be paying a dividend within fifty years.
But when sales growth is as hard to come by as it is these days, good judgment can give way to desperation. Barron’s proposed reviving the Dow Jones index with Apple and Google (GOOG). Maybe instead of a Nifty Fifty, we could have a Fab Five?
In any case, central bank action remains the swing factor. Neither the Fed nor the ECB are keen on doing more quantitative easing, in large part because they would like to see elected government take on more of the heavy lifting for rebuilding the economy, yet also due to concerns about putting an unhealthy amount of money into the system. Where exactly the border to too-much land lies is a matter of much opinion and no little controversy – you could start a bar fight about it inside the Beltway – yet none of us really knows.
One thing the central banks can be certain of, though, is that none of them want to be faced with trying to get the toothpaste back into the tube afterwards. That leaves them trying to steer between not abandoning the economy, yet not getting cornered into being the permanent fallback position either, leaving politicians free to bicker and avoid unpopular choices. In the meantime, the equity markets’ dependence on the heroin of liquidity to pull them out of every funk has led to an ongoing game of central-bank chicken and manic-depressive behavior in prices.
While equities should hit new highs in the early part of next week – it’s month-end! – it’s just a contrived blip. What happens afterwards will depend in large measure on what happens in the next couple of jobs reports.
GDP in the first quarter slowed more expected (see the Wall Street Journal’s good weekend summary, replete with charts, as well as our own discussion below), which doesn’t bode well for a meaningful improvement in employment. Though we would say that it was probably really below 2%, it wasn’t a disaster either, leaving markets vulnerable to a potentially confusing period where a little variance could provoke a lot of reaction. Imagine, for example, that the jobs report prints above 200,000 on Friday. Equities up, but the Fed stays on hold, and perhaps raises the forecast again. If, on the other hand, a stinker arrives with a gain below 100,000, equities sell off and the Fed has to worry again. A disaster of a report though, say something below 20,000, could provoke a stock market rally (at least in the U.S.) on the presumption that Fed action (QE-3) is now inevitable. In between is a great middle, where a number that is near consensus (currently 165,000) may well leave everyone in a muddle – and free to obsess over such matters as European elections and the next jobs report. The central bankers will be fretting right alongside the rest of us.
Ford (F) reported earnings on Friday, with the gist of it being that North American operations are running great, yet European ones lost a lot of money and Asia a little (partly due to expansion costs). Yet European equity markets rose because US equities did. That makes us uncomfortable. In 2006-2007, US markets rose in the face of a slowdown because global growth would bail us out of our problems. It didn’t. Now overseas markets are rallying because the US alone is going to bail out the globe?
Some strategists would say be quiet, and pass the easing bottle. Others are convinced that election-year historical patterns are too weighty for the market to pull back for long – and if the right number of strategic buyers believe in it during these trading market times, it could be self-fulfilling. We ourselves are hoping for a milder deceleration than the summer of 2011, in part because there is no tsunami, and in part because business investment has already started to ease. But a little slowdown could go a long way as the weather warms.
The Economic Beat
Although the first quarter is in the rear view mirror, the initial estimate for GDP growth is worth starting off with this week. The first thing that stands out about is that it came up short (which we predicted, but are too modest to bring up): the annual rate of 2.2% was well short of the 2.5% consensus and far from the many three-plus estimates that were floating across the tape that morning.
You will doubtless read attempts to apologize, cover up and otherwise obscure. There will be talk about consumer spending being stronger, with real PCE up 2.9%. Such talk will exclude mention that real final sales were at a 1.6% annual rate, or that real gross domestic purchases fell to 2.1% from 3.1% in the fourth quarter. The hero of all of this is the auto sector, which was responsible for half of the GDP number on its own. Motor vehicle sales certainly got off to a flying start, though the rate weakened in March; we’ll be interested to see April’s numbers next week (Tuesday). The warmest first quarter since 1895 surely pulled some spending forward.
A couple of anomalies stood out to us. One is that nominal GDP ran at the same rate (3.8%) in the first quarter as it did in the first. Another is that the price deflator was too low for the second quarter in a row. In the fourth quarter, the price deflator used was 0.8% (annualized), which we think was too low. We’ll cut the BEA (calculators of the GDP) a little slack on the grounds that a one-off dip in energy prices threw the data off in the quarter, even as core rates continued to rise.
But consider that the consumer price index rose at a 3.7% annual rate in the first quarter, the producer index rose at a 2% rate, and the BEA’s own estimate of the price index for gross domestic purchases was 2.4% (2.2% excluding food and energy). Yet standing alone next to all of these numbers is an inexplicably low 1.5% deflator (rate of price appreciation) for real GDP. What’s going on?
In any case, while 2.2% is certainly no disaster (much of Europe would be celebrating), it isn’t enough to put much of a dent in unemployment. The consensus for the April jobs report, due out next Friday, is for 165,000, though much of the Street is at 200,000 or above. The latter looks out of reach to us, especially given the recent claims data.
In support of the notion that the economy is not, in fact, running at a better rate than 2.2%, was some data from Federal Reserve branches: the Chicago Fed’s National Activity Index fell sharply to a minus 0.29 reading (from plus 0.07), and the Philadelphia Fed’s index of leading indicators eased to a 1.7% annual rate from 1.8%.
A good chunk of the softness in those two numbers can be traced to the weakness in the durable goods report, which fell (-4.2%), or (-1.1%) when excluding transportation. The business investment category fell (-0.8%). The weakness is going to show up in GDP when shipments start to ease.
Although new home sales for March came in above consensus, it was still the 3rd lowest March since records began in 1963 (thanks to Dave Rosenberg for that observation). Similarly, an above-consensus pending home sales report set off another knee-jerk rally in homebuilder stocks and on business television, but that neglects that pending sales have detached from real sales. Credit and appraisal conditions have been weighing down the realized sales rate. For that matter, pending sales fell in the Midwest and Northeast, suggesting that warm weather did indeed pull some sales forward. Case-Shiller home price data showed another decline for February.
The Conference Board’s Consumer Confidence came in a little below consensus, while the University of Michigan’s Consumer Sentiment index was a little above. The changes in both were really too small to have any significance except to an over-caffeinated stock market. However, the Bloomberg Comfort Index, which is still relatively young and not widely followed, reported a sharp drop.
The FOMC had nothing new to say, though the staff did raise their forecasts slightly. We don’t consider such revisions to be terribly important, as we have often observed that staff forecasts seem unable to account for an economy that pulses rather than moves in a straight line, and the revisions in either direction tend to be later reversed. A market looking for an excuse to put on a month-end rally jumped on Bernanke’s remarks that the Fed would act if necessary (as if a Fed chairman would ever say anything else).
Although there are still many companies reporting earnings next week, economic data should move back to center stage. Jobs and manufacturing are back on center stage, with purchasing manager reports from Chicago on Monday, national manufacturing (ISM) on Tuesday and non-manufacturing on Thursday. Job conditions will start on Wednesday with the Challenger layoffs report, followed by ADP payroll estimates. The Labor Department’s initial estimate for April employment comes on Friday.
Rounding out the week: March personal income and spending on Monday (whatever is reported, it’s the last day of the month and traders are anxious to rally, barring the unforeseeable, thus the rally will be falsely attributed to one of the reports); construction spending and auto sales on Tuesday; factory orders on Wednesday (which will be down, but also have a revision for durable goods); April same-store sales (partial) on Thursday. Productivity and costs are also due on Thursday, and while the data isn’t market-moving, it does give a good clue about the winds that corporate profits will be sailing on.